Student Loans: Could Your Co-signer Kill Your Credit?

The Consumer Financial Protection Bureau released a report by Rohit Chopra that highlighted an important issue in the student loan landscape. Student loans are going into default because a co-signer dies or files for bankruptcy, and it’s happening sometimes faster than borrowers can take action.

Till death when you come apart?

The CFPB reported receiving ongoing complaints from borrowers who find out upon the death of their co-signer (usually a parent or grandparent) that a student loans has gone into default. We’ve reported on a related story that turned on death-related default, but according to the CFPB the problem is pervasive.

The common assumption among borrowers is that the death of the co-signer releases that party from their debts, but lenders are taking actions that say otherwise, threatening to place liens on the decedent’s property and other assets unless the full amount owed is paid in full.

While on the surface, it makes more sense to give the surviving borrower a chance to find a new co-signer or otherwise meet the lenders requirements on loans that are in good standing, the CFPB reports that automatic default is the more common outcome. Complaints have included outstanding loans being sent to debt collection agencies that have tried to collect even after estates have been closed and settled.

Bankruptcy

Complaints received by the CFPB also included borrowers whose loans were in good standing but nonetheless received notices that their loans were in default because their co-signer went into bankruptcy, and during the bankruptcy process they were not even able to access billing statements, make online payments or make other inquiries regarding their loans. Lenders in some instances demanded accelerated payment.

There is help out there

According to the CFPB, “In 2008, 67% of private student loans were co-signed, often by a parent or grandparent. By 2011, over 90% of loans were co-signed,” so the issue effects most borrowers today. The problem in both instances is that there is no simple remedy for borrowers, and plenty of adverse effect in the form of damaged credit profiles due to a default or the inability to make timely payments due to a co-signed loan getting ensnared in a bankruptcy case.

In a consumer advisory also released today from the CFPB, Chopra has provided recommendations that may help borrowers in a co-signed loan. He suggests borrowers should look into their lender’s co-signer release policy. While lenders do not always advertise it, most loans allow a borrower to release a co-signer after a certain number of payments on a student loan in good standing. The advisory includes form letters that can help borrowers navigate co-signer issues.